In a year of two halves, the domestic automobile industry that found itself in a deep rut in second half of 2018, stares at the possibility of the negativity spilling over in the new year.

Sale of passenger vehicles are estimated to have declined by nearly 2 per cent in the second half of 2018, undermining the high 13.3 per cent growth that was registered in first six months. Sales declined for three consecutive months in July, August and September, stabilising briefly in October only to decline again in November. All-time high discounts and incentives to liquidate stocks in the last month of the year have helped prop numbers in December, but the growth is still a muted under 2.5 per cent over previous year.

The slowdown has impacted projections for the financial year (Apr-Mar) as well. Against an expectation of double-digit growth at the start of the year, the hope is now of at least a revival in the last three months of this fiscal.

"We registered double-digit growth in the first half of the year, but the third quarter has been tough. We are targeting flat sales in this quarter," says R.C. Bhargava, Chairman, Maruti Suzuki India. "In the last quarter (Jan-Mar), there will be some growth? 5-6 per cent that will put the full year figure at 8 per cent. We will strive for a double- digit growth, but it will be tough."

The initial ominous signs came in the first week of August when heavy rains hit Kerala in 2018, ahead of one of the state's biggest festival, Onam. Followed by Ganesh Chaturthi in the west, and Navratri and Diwali in the north, Onam in many ways marks the beginning of a nearly three months of good sales for automobile companies. A bad Onam was a bad omen.

"Kerala is a very robust market. It contributes 10 per cent of industry sales and is a dependable market; everybody looks at Kerala to offset any shortfall in other markets," says Rajesh Goel, Senior Vice President and Director, Honda Cars India.

After registering a blistering near 20 per cent growth in sales in the first quarter of this fiscal, it was almost as if somebody hit the brakes with full force for the domestic passenger vehicle industry. In the second quarter, sales declined 3.6 per cent as the industry went into a tailspin with red ink for three consecutive months for the first time since 2013/14. In the third quarter, sales are estimated to have declined by another 1.96 per cent.

"The three months of August, September and October were bad. In October, there was a slight recovery compared to the other two months, but even then it was lower by at least 10 per cent compared to 2017," says Goel.

While the calamity in Kerala was unforeseen, other more fundamental factors were also adverse. Crude oil prices started rising from March 2018 and went up by over 45 per cent year on year in the April-October 2018 period as compared to the same period in 2017. During this period, retail prices of petrol went up by over 11 per cent. Interest rates also went up by 25 basis points in the first half of last fiscal. Further, insurance regulations also underwent changes. Payment of three-year premium in the first year of purchase for third-party liability was made mandatory and personal accident cover (PAC) was increased from Rs 2 lakh to Rs 15 lakh, which led to an increase of Rs 6,000 in premium (Rs 4,500 if PAC is of one year) for even an entry-level car like Maruti Alto.

All these factors together slowed the automobile industry's growth story. The casualty was the festive season when sales usually reach their peak.

Industry body, Society of Indian Automobile Manufacturers - which collates wholesale data for the auto industry, said companies shipped 5.6 per cent less cars and 8.3 per cent less SUVs to their dealerships in September 2018. This was the steepest decline in a month since June 2017, when dispatches were artificially low due to the roll-out of a unified GST in July. The lower shipment was a clear indication that consumers were not inclined towards buying cars. "It is obvious there is a mismatch in demand and supply so the inventory is high in dealerships," says Rajan Wadhera, President, Automotive Sector, M&M, in mid-October.

"In the run-up to festive season, manufacturers stock up at dealerships and if the sales are not commensurate to expectations, there is a problem of inventory which would need to be cleared at some point of time."

Much against hopes of the industry, the script would not change during Navratri or Diwali as sales slumped to a five-year low. According to the Federation of Automobile Dealers Association (FADA), retail sale of passenger vehicles during the 42-day period of festive season between October 10 and November 20 last year declined 14 per cent compared to the festive season of 2017.

"We have not seen such a dull festive season, in the past few years," says FADA President, Ashish Harsharaj Kale. "It is a matter of deep concern for our dealership community."

"The festive season was below expectations. We were expecting that sentiment to revive by Diwali but factors like interest rates, firm fuel prices and additional cost of Rs 9,000 on insurance premium were a drag," says R.S. Kalsi, Executive Director, Marketing and Sales, Maruti Suzuki India. "The second half of the year has some concerns and growth may not pick up as the sentiment continues to be low."

The sluggish offtake of cars and SUVs has jeopardised plans for the rest of the year with inventory levels continuing to be high at the dealerships. Before the festive season, inventory level for the industry at large stood at around 50 days. This has barely come down to 45-days by the end of November and remains higher than normal. As a result, most carmakers like Maruti, Toyota and Ford reported a decline in shipments to dealerships in November. Even Hyundai Motor India, which launched the new Santro in end October, and Tata Motors that had for all this while in the fiscal been an outlier, could not manage to grow their numbers during the month.

What does the future hold for the industry? In the immediate short term, companies would be forced to dole out heavy discounts to clear the inventory. Typically, buyers stay away from purchasing in December as the year draws to a close fearing low resale value. In just a month or less, a car bought in December depreciates faster on book value due to the model year change. Carrying inventory to the next year for any dealer in particular, is always a headache.

There may be some respite for the industry as macroeconomic indicators for the economy seem to be improving. After reaching a high of $86 per barrel in October, Brent crude prices have slumped to under $60 per barrel. As a result, retail prices of petrol have gone down by Rs 15 per litre from the highs of early October. Rupee has also appreciated against dollar, while the threat of any interest rate hike by the RBI looks unlikely for now.

"Economic indicators seem to be looking up from the last week of October, but the impact is still not visible on the ground. I am hoping it will become visible over the next few weeks," says Goel of Honda.

An industry that braved disruptions like demonetisation and GST better than others, the passenger vehicle makers in the country now appear to be stuck on reverse gear.